How is the game played?
It can be a reaction to a short term dip in revenue, with the belief that lower prices will attract more business and prop revenues back up.
It can be a vehicle to promote a particular product or service that is running below forecast. The intent is to get the customer’s attention with a slashed price and hope that sufficient sales volume will stimulate sales.
The most common play, however, is a “me too” response to a competitor’s move. The competition drops their prices and the marketing analyst thinks they must match or undercut the competition to prevent customers from leaving.
At the end of the day, those who price cut trust that this strategy will make their business better off, that somehow they will gain a market advantage in the long run.
The benefits of slashing prices are illusory or short term at best. Sales revenue may spike up in the short term but it comes at the expense of lower margins unless costs can be reduced at the same time (which rarely happens).
Price cutting has little strategic value; it never enhances your market position. It contributes nothing to differentiate you. It doesn’t make you special or unique in the eyes of the customer.
In fact it has the opposite effect. It shouts out your status as a commodity player who is interested in providing little more than low prices. Price floggers are a dime a dozen; you will not likely win this game. You might keep your head above water for a short time but sooner or later you will either hit the margin wall, or some gunslinger will come along and lower their prices again.
And the race to the bottom is on.
Stand-out marketing organizations learn to manage market share and profitability by maintaining prices higher than the competition.
“The reason it seems that price is all your customers care about is that you haven’t given them anything else to care about. “ – Seth Godin
Here are 3 actions you can take to avoid the price trap:
1. Set your priority to manage market share and profitability by focusing your efforts on “high value” customers where profitability is healthy. Let competitors have the low margin segments.
2. Resist the temptation to lower prices across the board in favour of targeting price programs to specific vulnerable market segments. In the face of the competition entering long distance markets at prices 15-20% lower than incumbent telephone companies, flat rate packages (like 100 minutes for $10) were introduced for heavy users at a premium to the competition. It worked.
3. Focus on creating additional value to support higher prices for your products and services. Offering product packages and added customer service features are ways to keep prices higher than the competition.
Stand-out marketing organizations are premium price suppliers and they win. They are rewarded with fans who love them and spread their word to others because they’re worth it.
– What’s the conversation in your organization: is it about how to add value or reduce price?
– How frequently do you have special promotions that reduce prices?
– When you talk to your customers, what’s the main message: your low prices or your premium value?
– Do you offer product or service bundles with price discounts for buying more?
– How many initiatives do you regularly have to add value to your offerings and increase price?
– When you compare yourself with your competitors, is it mainly about price?
Price = $0.00 means you offer no value.
Is that really where you want to be?